DOL Rule or Not, Fat Bonus Checks Fading into Sunset

Juicy seven-digit bonus checks doled out by the likes of Merrill Lynch and Morgan Stanley might be a recruiting tactic that’s rapidly fading from the U.S. wealth management market.

Indeed, industry experts are seeing upfront signing bonuses offered by big brokerages shrinking by as much as half of what they were less than a year ago.

But forecasts of a major slowdown in deal volume might be a bit premature. Just ask Robert Mitchell, a partner at Tiffany & Bosco. Although lucrative golden handcuffs are fading as terms expire, the Phoenix-based lawyer is still seeing robust activity.

“I’m getting at least a dozen phone calls a week from advisors who are considering moves involving signing bonuses or trying to extract themselves from contracts with former employers,” Mitchell says.

Since last fall, though, he reports seeing a “substantial” retrenchment in transition packages being offered. Typically, Mitchell says he’s now seeing upfront bonuses priced at anywhere from 100% to 150% of trailing 12-month revenue. That compares to deals that in many cases used to top 300% in total value.

Mitchell credits a big part of that slashing to conflict of interest issues raised by the Department of Labor rule, which is designed to bring heightened fiduciary standards to working with retirement accounts.

“Firms today are largely just offering front-end signing bonuses with incentives for advisors to stay longer – not back-end deals designed around future productivity,” Mitchell says.

Until the dust settles around the DOL rule, recruiter Howard Diamond expects to see firms keep “getting more creative” in promoting dynamics such as greater access to staff, product diversity and marketing support. Another point of focus might be on terms and lengths for such inducements, which he says act like forgivable loans and typically last for around nine years.

“If the DOL rule is replaced or disappears, we might see back-end bonus packages resurface,” Diamond says. “But the huge deals of the past are definitely going the way of the dodo bird.”

Not all firms are choosing to walk away from back-end incentives, notes Mark Elzweig, an industry recruiter who’s been tracking advisor moves for more than three decades.

But even in those cases, he’s generally finding that total upfront money – involving both front- and back-end financing – lands in the 200% to 250% range, down from past levels of more than 300%.

Regardless of payment structure, Elzweig says overall deal volume is “significantly” down this year for advisors moving between wirehouses. “But this represents a tweaking, not a wholesale pullback,” he adds.

At the same time, Elzweig isn’t seeing a major slowdown in movement of wirehouse brokers to independent RIAs and indie broker-dealers. “When markets are skyrocketing the natural inclination of many advisors is to pause and enjoy the ride,” he says. “But it’s still a pretty resilient independent marketplace in terms of signing bonus volume.”

Sandra Cho

Even so, slimmer recruitment deals might prove more of a headwind in coming years, warns Sandra Cho, who spent more than a decade in JPMorgan Chase’s private client group.

“Regardless of size, as soon as you take an upfront check you’re putting a price on your head,” says the founder of Pointwealth Capital Management, who left JPMorgan to form her own indie firm about 18 months ago. The Encino, Calif.-based advisor now manages more than $105 million.

Cho says she turned down signing bonuses of between $1.7 million and $1.9 million before deciding to make a complete break to independence. “Fortunately, I had the financial strength to stand on my own and look at bonus offers with a skeptical eye,” she adds.

One ex-colleague who’d accepted a juicy check to make a leap told her that a glaring mistake he’d made was to not calculate how much more in taxes he’d wind up paying. “As soon as he accepted upfront money he was locked into paying a lot more in income taxes for years to come,” Cho says.

Another word of caution she heard from breakaways was to resist any temptation to spend too much too soon. Some advisors even lamented stories of buying new cars and houses to try to improve their images with wealthier clients.

“In the end, the message was the same – I shouldn’t expect to get much in the way of immediate rewards from any bonus money because it’s best to stick a big chunk in the bank until the loan is forgiven,” Cho says.

Such “practical” lessons of the “dark side” of accepting recruiting bonuses are bound to become more widespread, she predicts, as advisors are offered more choices in financing their own deals.

“As the carrots being offered through upfront money shrink,” Cho says, “advisors are going to increasingly take a harder look at how much they really need to enter into these deals in the first place.”